Pensioners have been warned their estate could be liable for an inheritance tax bill of many thousands of pounds if they do not take action.
More families are being hit by the tax as the thresholds have been frozen while house prices and other asset prices have risen over the past few years.
Alice Guy, head of Pensions and Savings at interactive investor, said: “Pensioners with modest incomes who’ve never felt rich could be left with a huge tax bill when they pass on wealth.
“The average home in London is now worth £525,000 and could attract an inheritance tax bill of £80,000, depending on other reliefs.”
Inheritance tax (IHT) is a 40 percent tax that applies to any total inherited assets above the value of £325,000 from a single person, or £650,000 from a couple.
There is an additional nil-rate band if a primary residence is being inherited by the deceased person’s children or grandchildren, with an allowance of up to £175,000 for single people and up to £350,000 for couples.
An IHT bill can be worth many thousands of pounds and it has to be paid within six months of the person’s death, so it can cause a lot of pressure for a grieving family.
Fortunately, there are several things people can do to reduce their IHT liability, such as giving away gifts.
Ms Guy said: “If you can afford to give away lifetime gifts then this can be a great way to reduce your inheritance tax bill.
“You can give away up to £3,000 each tax year and put that money immediately outside your estate for IHT purposes.”
The £3,000 in gifts can be divided among any number of people. A person can also separately give away gifts of up to £250 to any number of people.
A person can also give away larger amounts but they will need to survive for another seven years for their gift to avoid the tax.
Another way to avoid the tax is to invest one’s estate in pensions as these investments are not considered part of a person’s estate for IHT purposes.
People can also arrange to put some of their assets into a trust, as this is also not considered to be part of a person’s estate. These can be complicated to set up so it’s worth going over this with a financial advisor.
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